BoC prediction is a double-edged sword for brokers

The Bank of Canada expects inflation to hit its 2% mark in mid-2017, which would put an end to economic stimulus. But growing mortgage and household debt may speed up the move.

“Vulnerabilities in the household sector are continuing to edge higher,” the Bank of Canada said Wednesday in a Monetary Policy Report outlining the threat that poses. “Persistent strength in household spending would provide a near-term boost to economic activity, but it would also further exacerbate existing imbalances … increasing the likelihood and potential severity of a correction later on.”

Brokers, of course, want to avoid that kind of downturn in home prices and are rooting for a strengthened economy. Still, the trade-off of meeting any inflation target would put an end to economic stimulus and record-low rates.

According to the Bank, the most likely scenario is that these imbalances soften as the economy improves but that “a disorderly unwinding, such as one that might be triggered by further weakness in the resource sector or a rapid rise in global interest rates, could have sizable negative effects on the economy.”

Other threats to inflation – and the Canadian economy improving to the point of allowing for an increase in rates – include weaker Canadian exports and investment, higher non-energy commodity prices, stronger U.S. private demand, and market stress coming from emerging markets.

However, assuming that further imbalances in the housing sector – and the other threats to inflation – are avoided, the Bank expects the economy to stabilize by mid-2017.

“Once the economy reaches and stabilizes at full capacity around mid-2017, total CPI inflation and core inflation will remain at 2%on a sustained basis,” the Bank said. “Medium-term inflation expectations continue to be well anchored at 2%.”